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Rates eye flashback to 2003 lows

The drop in inflation and a slowing of the economy is expected to drive rates below 10 per cent by the second half of 2009, except on personal loans. Rajendra Palande reports.

business Updated: Dec 29, 2008 22:52 IST
Rajendra Palande

For about 50 lakh home loan borrowers, the year 2009 could mean a return to the single-digit interest rate years of 2002 and 2003.

The drop in inflation and a slowing of the economy is expected to drive rates below 10 per cent by the second half of 2009, except on personal loans.

In 2002, interest rates on home and car loans ranged from 7.5 to 9 per cent.

With deposit rates dropping to 2002-03 levels, banks are expected to correct the imbalance between their benchmark rates and their actual lending rates. Banks would want to lend at their prime lending rates (PLR) or above. Currently, about of 80 per cent of all bank loans are below PLRs denoting the rate for lowest risk borrowers.

“We want to lower PLR aggressively. The idea is to have all borrowers at PLR (or above),” said K C Chakrabarty, Chairman of Punjab National Bank (PNB). About 60 per cent of PNB’s loans are at interest rates below its PLR, which would be 12 per cent from January 1.

Policy rates, the Reserve Bank of India’s (RBI’s) short term lending rate (repo) and the reverse repo rate at which it takes bank deposits, are expected to fall below the 2004 levels of 6 per cent and 4.5 per cent, respectively, in 2009.

“We expect the Reserve Bank of India to cut rates aggressively to prevent real interest rates from rising sharply,” said Sonal Varma, economist at Nomura.

Real interest rate is the difference between current interest rates and inflation—and is around 3-4 per cent.